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The World's Best Dividend Stocks

Don't limit yourself to U.S. blue chips.

American blue chips have been the backbone of many investors' portfolios for the past century. In fact, Abbott Labs(NYSE:ABT), PepsiCo(NYSE:PEP), and Colgate-Palmolive(NYSE:CL) were three of the best stocks from 1957 to 2003, according to research by Wharton professor Jeremy Siegel. For some, these stocks helped build sizable fortunes.

Undoubtedly, domestic dividend payers will continue to play an important role in our portfolios into the 21st century.

But restricting yourself to just American blue chips going forward would be like entering a prize fight with one hand tied behind your back. To capitalize on the benefits of this century's best dividend-paying stocks, you need to look outside our borders.

Stamp your passportOver the past decade -- especially the past five years -- the global economy has grown remarkably. And that growth will only continue as more capital is invested abroad -- not only into emerging markets like China and India, but also into more developed markets like Greece and Ireland.

What's more, you're likely to find more companies paying higher dividends abroad. According to Bloomberg, "Dividends for the U.K.'s FTSE 100 index are also two-thirds more than those of the Dow Jones Industrial Average in the United States." Moreover, the NZX 50 index in New Zealand pays an average dividend yield around 6%.

It isn't even closeForeign cash cows have been beating up their American counterparts since 2003. A screen on Capital IQ for companies capitalized at greater than $1 billion, with a current dividend yield exceeding 2%, illustrates the profound disparity quite nicely.

Fully 37% (73 of 199) of foreign dividend-paying stocks that trade on a U.S. exchange have more than doubled in the past five years. Included in this group are PetroChina(NYSE:PTR), up 452%, and Sasol(NYSE:SSL), up 512%.

On the other hand, only 17% (86 of 502) of U.S. companies that meet these criteria have more than doubled since July 2003. Some of the stocks on this list include Reynolds American(NYSE:RAI), up 233%, and Honeywell(NYSE:HON), up 100%.

Achtung, babyThere are always added risks to consider (politics, currency, etc.) before investing abroad, but dividend-minded investors stateside will want to note two things in particular:

1. Dividend regularityOr lack thereof. Foreign-company dividends may be larger, but they're often less regular in timing and amount. Companies abroad like to pay out a target percentage of earnings instead of a certain dollar value every year. Don't knock it: Freed from the pressure to lowball their payouts, these companies can pay you more over the long haul.

2. Dividend taxationForeign countries (the U.K. is an exception) will scalp your scratch by their going rate. Still, most countries in which you're likely to invest have tax treaties with the United States (Google "IRS publication 901" for the complete list), meaning you can claim a credit for the tax withheld. Here's the rub: Because a credit offsets taxes you would have otherwise paid, it's smart to hold foreign stocks in a taxable account. In other words, skip the IRA if you're going abroad.

Feeling overwhelmed, but don't want to pass up the double benefit of foreign growth potential and dividends? I urge you to consider a free examination of the Motley Fool Income Investor newsletter service, and join us in our quest to find the world's best dividend payers.

The Income Investor service has 20 active international recommendations at present, plus a stable of domestic dividend divas. Moreover, it's thumping the S&P 500 by nearly six percentage points. You can get your free guest pass via this link.

This article was first published June 28, 2007. It has been updated.

Todd Wenningis split on whether Achtung Baby or The Joshua Tree is the best U2 album. He does not own shares of any company mentioned. Sasol is a Motley Fool Global Gains and an Income Investor pick. Colgate-Palmolive is an Inside Value recommendation. The Fool's disclosure policy pays dividends daily.